The Reserve Bank of Australia released its semi-annual Financial Stability Report yesterday and, among other things, noted the growth in lending to investors buying residential property. The RBA said that this has resulted in the composition of the housing and mortgage markets becoming unbalanced - lending to investors is out of proportion with the share of rental housing of the overall housing stock.While the RBA believes that the risks faced by investors in housing are becoming significant, the risks to lenders are not, as yet, so great. Nevertheless, the RBA notes that the recent measures announced by APRA should promote stronger risk management practices by lenders. The RBA explicitly stated that it is discussing with APRA, and other members of the Council of Financial Regulators, additional steps that might be taken to reinforce sound lending practices, particularly for lending to investors. No details were given on what steps may be taken, and no doubt this will be influenced by any recommendations that the Financial System Inquiry might make in its final report.Some analysts and other commentators seem to favour the introduction of quantitative controls, as has been done in New Zealand and Canada. In New Zealand's case a restriction on high loan to valuation ratio lending, introduced just on a year ago, appears to have taken the heat out of the Auckland and Christchurch housing markets. However, yesterday the head of ANZ New Zealand was reported to have blamed the restriction for driving up prices at the bottom end of the housing market and forcing first home buyers out.Any sort of quantitative control will introduce market distortions. Economic purists always favour price signals as a means of influencing the behaviour of market participants.Of course some price signals can be blunt and can influence behaviour in more sectors than just the one intended. Raising interest rates via the official cash rate would have just this effect.Sure it would slow down demand for investment mortgages and may even lead to house prices falling, but at the same time demand across the whole economy would fall and economic growth would slow. And an added risk is that the value of the Australia dollar would start to rise again, relative to other currencies and the trade weighted index. This would put the export and import competing sectors of the economy under pressure just as the dollar has been easing this year. Again, a slowing of economic growth would result.Raising the amount of capital that banks must hold, say by mandating a counter-cyclical buffer, would also send a price signal. All bank lending would become more expensive, which in the first instance would have the same effect as raising interest rates. However, it may also prove to be counter-productive. The highly favourable treatment accorded residential mortgages for determining the amount of risk adjusted capital required to support such lending means banks get the biggest bang for their capital buck from making housing loans.Thus housing loans may become even more favoured than they are now. Another